In Cypress Semiconductor Corp. v. Maxim Integrated Products, 236 Cal. App. 4th 243 (6th Dist. 2015), the California Court of Appeal, Sixth Appellate District found that a defendant in a trade secrets suit can be deemed a “prevailing party” entitled to attorney fees under California Civil Code § 3426.4 when a plaintiff voluntarily dismisses its lawsuit to avoid an adverse determination on the merits. Although attorney fees provisions in contracts are governed by California Civil Code § 1717—which defines “prevailing party” in a manner that excludes voluntary dismissal without prejudice as a basis for finding prevailing party status—attorney fees awarded per statute are not subject to § 1717. Cypress clarified that, at least under § 3426.4, prevailing party status can be found following a voluntary dismissal without prejudice.
Plaintiff Cypress sued defendant Maxim, alleging that Maxim had misappropriated a trade secret, or was in the process of doing so, by seeking to hire away specialists in touchscreen technology. Cypress and Maxim compete in the field of touchscreen technology. Maxim responded that it was entitled to solicit prospective candidates from Cypress’ workforce and that there was no evidence it acquired, or sought to acquire, any trade secret. Cypress tried and failed to secure temporary injunctive relief, and failed to obtain an order placing under seal evidence derived by Maxim from public sources. Cypress then dismissed the action. The trial court awarded Maxim attorney fees pursuant to § 3426.4, which authorizes such an award to the prevailing party where a claim for misappropriation of trade secrets is found to have been made in bad faith.
On appeal, Cypress argued that the trial court erred because it could not properly find that Maxim was the prevailing party, or that Cypress brought the action in bad faith. The court found that (1) the trial court’s findings are free of procedural error; (2) the finding of bad faith is supported by evidence that defendants merely attempted to recruit a competitor’s employees, which Maxim was entitled to do under California law; and (3) Maxim prevailed when, as the trial court implicitly found on substantial evidence, Cypress dismissed the suit to avoid an adverse determination on the merits. As the court explained, “At the core of the case was Maxim’s right to solicit Cypress employees.”
Because litigation often ends in mixed results, identifying the prevailing party is not always straightforward. Cypress argued, unsuccessfully, that the lower court erred when it deemed Maxim the prevailing party because it was required under California law to determine whether Maxim had prevailed “on a practical level” ; citing Heather Farms Homeowners Assn. v. Robinson, 21 Cal. App. 4th 1568 (1st Dist. 1994). The court noted that while some decisions have interpreted different statutes awarding attorney fees to prevailing parties by deciding whether they had prevailed “on a practical level,” it found that those cases were implicitly concerned with the risk that a mechanical definition of prevailing party would produce arbitrary or inequitable results where the party seeking fees had achieved only a “superficial or illusory success.” Here, specifically interpreting § 3426.4, the court reasoned that because the legislature showed “manifest legislative intention” to avoid imposing the costs of defense of suits brought in bad faith on defendants, § 3426.4 warrants a liberal construction of prevailing party, “trusting in the 'bad faith’ requirement to filter out doubtful cases.” Put another way, the court found that in ruling on motions for attorney fees under § 3426.4, trial courts should direct their inquiry to the bad faith requirement. Following Cypress, trial courts arguably no longer need to consider whether defendants prevailed on a “practical level” before awarding fees under § 3426.4 as long as defendants show that plaintiffs’ allegations were brought in bad faith.
The court, however, did not solely rely on § 3426.4’s liberal construction and bad faith requirements. Instead, the court found that even under the general standard favored by Cypress, Maxim prevailed “on a practical level” because Cypress’ complaint was “meritless on its face, based upon theories of liability that were not merely specious, but nonsensical.” The court went so far as to characterize Cypress’ argument as “a kind of carnival fun house in which the facts of the case are distorted into grotesque and nearly unrecognizable shapes,” adding that Cypress “gained no legitimate benefit from the action, practical or otherwise.” The court acknowledged that Cypress, at most, “succeeded in notifying the labor marketplace that it would resort to spurious litigation to prevent poaching” of its employees, but found that because this objective “is contrary to California law and policy,” its achievement “cannot be considered the kind of success that will sustain prevailing party status, or prevent an opponent from acquiring that status, under § 3426.4.”
The extreme facts here suggest that future litigants will attempt to distinguish Cypress by arguing that their own allegations did not match those in Cypress. Indeed, the court arguably set a high bar when it found that “[t]he only plausible explanation for Cypress’ dismissal of the action is that it feared a determination on the merits.” Regardless, defendants in trade secrets suits who successfully persuade plaintiffs to voluntarily dismiss their complaints should consider moving for attorney fees if they can credibly argue that the plaintiffs’ complaint was brought in bad faith and plaintiffs dismissed the lawsuit to avoid an adverse determination on the merits. Indeed, defendants now have an additional lever to pull in settlement negotiations: defendants can agree not to file a motion seeking attorney fees (which are expensive to file or oppose) in exchange for more favorable terms from plaintiffs. By the same token, plaintiffs should insist on settlement terms that preclude defendants from seeking attorney fees before voluntarily dismissing a trade secrets action in California.
Although the Legislature has not defined “bad faith’” for the purposes of § 3426.4, courts have developed a two-prong standard: (1) objective speciousness of the claim, and (2) subjective bad faith in bringing or maintaining the action, i.e., for an improper purpose. See FLIR Systems, Inc. v. Parrish, 174 Cal. App. 4th 1270, (2d Dist. 2009).
The court reaffirmed that a defendant moving for attorney fees under § 3426.4 is not required to conclusively prove a negative (i.e., that they did not steal the plaintiff’s trade secrets). Instead, under the “objectively specious” standard, it is enough for defendants to point to the absence of evidence of misappropriation in the record. The court looks first to materials that plaintiff puts in the record through the complaint and any related materials.
Here, the court found sufficient evidence of objective speciousness, calling the complaint “a model of evasive, equivocal, and circumlocutory pleading.” Indeed, the court rejected Cypress’ two theories of liability—that Maxim was using trade secrets to identify Cypress’ “touchscreen employees” and that Maxim was attempting to hire these employees for the purpose of gaining access to trade secrets they had learned in their work for Cypress—and found that the manner in which they were pleaded “strongly suggests that Cypress never had any evidence to support either of them.”
First, the court found that Cypress’ allegations relating to Maxim’s alleged use of Cypress trade secrets to identify Cypress employees with knowledge of touchscreens was entirely speculative, and that Cypress itself appeared to acknowledge in the complaint that Maxim compiled the list of Cypress employees on its own.
Second, the court found Cypress’ claim that Maxim was seeking to hire Cypress employees so that it could then pick their brains for trade secret information amounted to a claim for threatened misappropriation. Despite Cypress’ efforts to disclaim reliance on the doctrine of inevitable disclosure (which has repeatedly been rejected in California), the court found that “the complete absence of any coherent factual allegations suggesting a threatened misappropriation, Cypress’ second theory of relief was an inevitable disclosure claim, or it was no claim at all.” Cypress serves as a reminder that where plaintiffs’ allegations suggest concern over future misappropriation or misuse of trade secrets, defendants should consider framing plaintiffs’ allegations as improper attempts to rely on the doctrine of inevitable disclosure.
The court heard and rejected a number of procedural challenges brought by Cypress regarding the subjective prong of the bad faith analysis. Most significantly, Cypress argued that the trial court’s judgment should be overturned because the trial court did not find that Cypress lacked a subjective belief in the merits of its case. The court rejected Cypress’ argument, reasoning that if the trial court finds a claim is objectively specious, and that the plaintiff made it for an improper purpose, “there is no further requirement that the court also find a lack of subjective belief in the merits of its case.’” Here, evidence of improper purpose included: parties’ pre-suit correspondence that suggested Cypress’ goal was to scare Maxim away from attempting to hire any of Cypress’ touchscreen employees under any circumstances; Cypress’ failure to identify its trade secrets as required by § 2019.210; Cypress’ failure to respond to discovery requests asking Cypress to identify allegedly confidential information; Cypress’ failure to timely inform Maxim that it would dismiss the suit; and Cypress’ efforts to seal a compilation of publicly available Cypress information prepared by Maxim.
Notably, Cypress risks creating some confusion regarding the necessity of proving plaintiffs’ lack of subjective belief in the merits of their allegations. Although the court explained that “the test is not what the plaintiff believed about its objectively specious claim, but for what purpose it pursued such a claim,” it acknowledged that “a genuine belief that one’s claim has merit tends to show that it is being pursued for the proper purpose of vindicating a legal right honestly believed to have been infringed.” The court’s effort to reconcile these statements—i.e., explaining that “it does not follow, and is not the case, that a subjective belief in the merits will bar a fee award where an objectively specious claim is found on substantial evidence to have been maintained for an improper purpose” —risks eviscerating the subjective prong by suggesting that when substantial evidence of an objectively specious claim is found, courts can ignore a plaintiff’s subjective intent. Following Cypress, and in light of the difficulty of proving subjective intent through evidence, defendants seeking attorney fees should emphasize the lack of substantial evidence in support of a plaintiff’s allegations over the plaintiff’s subjective intent.
Although not expressly directed at § 2019.210 of the California Code of Civil Procedure, Cypress nonetheless impacts defendants’ ability to insist on a clear identification of trade secrets early in litigation. The court found an inference of “dilatory and oppressive intent” as a result of Cypress’ “belated and evasive response to Maxim’s demand for specification of the trade secrets at issue.” Relying on Perlan Therapeutics, Inc. v. Superior Court, 178 Cal. App. 4th 1333 (4th Dist. 2009), the court found that Cypress was not entitled to describe its trade secrets so vaguely as to amount to an “open-ended work in progress.” Cypress thus strengthens defendants’ ability to insist on a detailed § 2019.210 disclosure by making it clear that a failure to comply with the statute could result in an inference of bad faith that could trigger the award of attorney fees.
By making it easier for trade secrets defendants to recover attorney fees under § 3426.4, Cypress should discourage some plaintiffs from filing baseless complaints and strengthen defendants’ ability to settle cases early before spending too much on fees.